Hugh C. Carney Senior Counsel II (202) 663-5324 hcarney@aba.com By electronic submission October 26, 2012 Jennifer J. Johnson Secretary Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue, N.W. Washington, DC 20551 Robert E. Feldman Executive Secretary Attention: Comments/Legal ESS Federal Deposit Insurance Corporation 550 17th Street, N.W. Washington, DC 20429 Office of the Comptroller of the Currency 250 E Street, S.W. Mail Stop 2-3 Washington, DC 20219 Re: Supplement to Joint Trade Association Comment Letter on Proposals to Comprehensively Revise the Regulatory Capital Framework for U.S. Banking Organizations Regulatory Capital, Implementation of Basel III, Minimum Regulatory s, Capital Adequacy, Transition Provisions, and Prompt Corrective Action (OCC Docket ID OCC-2012-0008, RIN 1557- AD 46; FRB Docket No. R- 1442, RIN 7100 AD 87; FDIC RIN 3064-AD95); Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements (OCC Docket ID OCC-2012-0009, RIN 1557 AD 46; FRB Docket No. R- 1442, RIN 7100 AD 87; FDIC RIN 3064-AD96); and Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule (OCC Docket ID OCC-2012-0010, RIN 1557 AD 46; FRB Docket No. R- 1442, RIN 7100 AD 87; FDIC RIN 3064-AD97) Ladies and Gentlemen: Attached please find the following supplement to page A-8 footnote 12 of Annex A of the comment letter filed on October 22, 2012 by the American Bankers Association, the Securities Industry and Financial Markets Association and The Financial Services Roundtable regarding three notices of proposed rulemaking issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation that would comprehensively revise the regulatory capital framework for all U.S. banking organizations ( Joint Trade Association Letter ).
This supplement provides additional data to support the Associations strong belief that the Agencies should not require unrealized gains and losses on available for sale securities to flow through to regulatory capital, as proposed under the Basel III Numerator NPR. Please do not hesitate to contact Alison Touhey, Senior Regulatory Advisor at 202-663-5182 (email:atouhey@aba.com) if you have any questions or need further information. Sincerely, Hugh C. Carney Senior Counsel II 2
AOCI Supplemental: Methodology and Discussion As discussed in detail in the Joint Trade Association Letter, the proposal to flow through to common equity tier 1 capital all unrealized gains and losses on a banking organization s available-for-sale (AFS) securities would create numerous unintended consequences. One such unintended consequence is the distortion of bank capital levels in changing rate environments, resulting in the under (over) statement of bank capital during rising (decreasing) interest rate environments, with the degree of perceived under (over) capitalization correlated with the amount by which rates rise (fall). The following elaborates on and explains the methodology behind Table A-1. The additional data provided below show that flowing unrealized gains/losses through to capital may, all else equal, cause capital adequacy to become dependent on the amount by which rates rise and the duration of bank investment portfolios. Methodology: ABA s analysis uses June 2012 Call Report data to estimate gains and losses on bank AFS portfolios and then applies the gain/loss to the Tier 1 leverage ratio, Tier 1 capital ratio and the Total Risk Based capital ratio of individual banks. The analysis assumes portfolio durations of 1 to 6 years, with each duration run through interest rate increases of 100 to 600 basis points. For example, assuming a duration of 3 and an interest rate increase of 400 basis points, an estimated 6% of banks could fall below one or more of the Well Capitalized ratios due solely to increasing interest rates. 1 For simplicity and illustrative purposes, the analysis attempts to isolate likely changes in capital as a function of interest rates, rather than safety and soundness or other considerations. The analysis, then, does not consider any actions a bank may take to mitigate its interest rate risk, such as holding a de facto buffer to mitigate capital volatility or significantly shortening the duration of its investment portfolio. Further, given both the historically low interest rate environment and that rising rates would significantly underestimate a bank s capital, our analysis only considers the impact of a rising rate environment. However, it is likely that a future decreasing rate environment would lead to a corresponding overstatement of capital. 1 To better isolate the effects of rate changes on capital, this version of the data excludes those institutions currently falling below any of the Well Capitalized ratios. Therefore, the numbers vary from those found in table A-1 of the Joint Trade Association Letter. 3
Duration: 1 Number of US Potentially Falling Below Well Capitalized If the AOCI Filter is Removed 100 bpts 0 0 1 0 0% 200 bpts 10 4 5 6 0% 300 bpts 15 10 17 19 0% 400 bpts 20 14 29 33 0% 500 bpts 32 23 45 55 1% 600 bpts 42 31 62 74 1% Duration: 2 100 bpts 10 4 5 6 0% 200 bpts 20 14 29 33 0% 300 bpts 42 31 62 74 1% 400 bpts 75 51 105 134 2% 500 bpts 145 86 183 250 3% 600 bpts 250 160 313 410 6% Duration: 3 All All All 100 bpts 15 10 17 19 0% 200 bpts 42 31 62 74 1% 300 bpts 104 65 141 185 3% 400 bpts 250 160 313 410 6% 500 bpts 489 376 656 778 11% 600 bpts 805 703 1,086 1,221 17% 4
Duration: 4 100 bpts 20 14 29 33 0% 200 bpts 75 51 105 134 2% 300 bpts 250 160 313 410 6% 400 bpts 591 472 773 917 13% 500 bpts 1,054 989 1,413 1,562 21% 600 bpts 1,541 1,583 2,015 2,148 29% Duration: 5 100 bpts 32 23 45 55 1% 200 bpts 145 86 183 250 3% 300 bpts 489 376 656 778 11% 400 bpts 1,054 989 1,413 1,562 21% 500 bpts 1,653 1,719 2,160 2,283 31% 600 bpts 2,249 2,414 2,826 2,922 40% Duration: 6 All All All 100 bpts 42 31 62 74 1% 200 bpts 250 160 313 410 6% 300 bpts 805 703 1,086 1,221 17% 400 bpts 1,541 1,583 2,015 2,148 29% 500 bpts 2,249 2,414 2,826 2,922 40% 600 bpts 2,852 3,069 3,404 3,493 48% 5